Markets have been sanguine about geopolitical risk for several years now, a phenomenon illustrated by the relaxed approach they have taken to Ukraine’s crisis.There are understandable reasons for this, but contrary to a popular saying, this could well be a case where the trend is not necessarily the markets’ friend.

After just one day of extreme nervousness, markets have had little problem digesting a major change in the map of eastern Europe. And Crimea’s annexation is not the only notable development in a crisis that has repeatedly surprised quite a few experts.The situation there now pits Russia against western Europe and the US in a manner more reminiscent of old-fashioned cold war dynamics than modern day diplomacy. The nucleus is a country that is a major east-west conduit for energy supplies. The country’s internal social and political situation is far from stable. And many believe President Vladimir Putin’s ambition may extend to other parts of Ukraine.After an initial flurry, markets have brushed aside these and previous geopolitical concerns, whether over Iran, Iraq, North Korea or Syria. They are now similarly relaxed about the Turkish government’s tensions, Venezuela’s volatile situation and Thailand’s struggles to fully restore socio-political calm.There are a number of reasons for this market tranquillity.

Smaller is safer

First, most of the recent turmoil has occurred in countries that, at least on a standalone basis, are systemically smallwhen measured by traditional indicators of contagion – namely, relative size in the global economy, cross-border trade linkages, financial network effects, and technical impact on market positioning.

Second, with no external power being economically – and politically – strong enough to impose its will on others, markets feel there are internal circuit breakers in each situation, limiting the risk of geopolitical over-reach.

Third, after a prolonged economic slowdown in the aftermath of the global financial crisis, North America and western Europe (the world’stwo largest economic regions and therefore the most systemic) have been slowly improving.Even Japan has done better.

Fourth, markets continue to have unshakeable faith in central banks’ ability to insulate them from weaker fundamentals, whether economic, financial or political.Finally, a powerful dose of adaptive expectations and behaviour is acting as a strong reinforcement.After all, markets love consistent trends, and the pattern of quickly fading geopolitical disruptions has been profitable for some time.There would be little reason to doubt this would continue were it not for the way these political crises are evolving. While each geopolitical shock has been small on a standalone basis, in aggregate they are starting to affect a more meaningful part of the global economy. And few, if any, can be resolved easily. Meanwhile, leaders in Europe and the US will come under increasing domestic pressure to act more forcefully externally, weakening the circuit breakers.

Institutional weakness Do not look to global co-operation as a way to diffuse most of today’s geopolitical tensions.Hampered by national politics, the effectiveness of multilateral institutions has failed to keep up with the increasing complexities on the ground.

This weakness could even start playing out in earnest in Ukraine in the next few weeks.All it would take is for additional blatant territorial intervention by Russia to trigger comprehensive financial and economic sanctions by the west. With Russia likely to retaliate by disrupting the supply of energy to western Europe, the world would be thrown into recession, along with renewed financial instability – a situation that would certainly derail capital markets.

While a notable risk, this is not the most likely scenario for the next few weeks.Instead, the situation is likely to stabilise temporarily at a new geopolitical equilibrium, albeit a fragile one, in which the west tolerates the annexation of Crimea and Russia’s “legitimate interests” there, whileRussia pays lip service to Ukrainian territorial integrity and supports international help for the country while deferring some of its own claims.Should this indeed materialise, markets would again feel vindicated in having responded rather calmly to the Crimea crisis. Yet they should guard against complacency based on a simple extrapolation of the past. Underlying geopolitical tensions around the world have been gradually building towards a tipping point.Should this continue, it would quickly become evident that many markets are underpricing geopolitical risk.Mohamed El-Erian is chief economic adviser to Allianz, chair of President Barack Obama’s Global Development Council, and author of ‘When Markets Collide’

LONDON – “What a commentary on the state of twentieth-century capitalism,” mused “motivational speaker” Jordan Belfort as he looked back on his life of fraud, sex, and drugs. As head of the brokerage firm Stratton Oakmont, he fleeced investors of hundreds of millions of dollars in the early 1990’s. I saw Martin Scorsese’s filmThe Wolf of Wall Street and was sufficiently intrigued to read Belfort’s memoir, on which the screenplay is based. I learned quite a lot.For example, the scam known as “pump and dump,” which netted Belfort and his fellow Strattonites their ill-gotten gains, comes into much clearer view in the memoir than it does in the film.The technique works by buying up the stock of worthless companies through nominees, selling it on a rising market to genuine investors, and then unloading all of it.It was not just small investors who were ruined; what stands out is the greed and gullibility of the rich who were sold the same rubbish by the “young and stupid” salesmen Belfort preferred to hire. Belfort was (is) obviously a super-slick snake-oil merchant, brilliant in his trade until drugs ruined his judgment.Belfort, once again selling the elixir of success after a brief stint in prison, professes to feelshame for his behavior; but I suspect that deep down his contempt for those he swindled outweighs any sense of remorse.In a recent book, Capitalism in the Twenty-First Century, the economist Thomas Piketty describes Stratton Oakmont as an example of “meritocratic extremism” – the culmination of a century-long passage from the old inequality, characterized by inherited wealth and discreet lifestyles, to the new inequality, with its outsize bonuses and conspicuous consumption.Belfort has been described as a perverse Robin Hood, robbing the rich to give to himself and his pals. The rich were the old-money Protestant establishment whose members had lost their skills for protecting their wealth, which was therefore rightfully forfeited to street-savvy up-and-comers – mainly Jewish – amoral enough to help themselves to it. But Stratton Oakmont’s peculations were hardly an exception on Wall Street. As a good friend, who was an SEC regulator for 20 years, told me when I asked about the extent of fraud, “I found it to be pervasive. The system simply makes it too easy, and human nature colludes on both sides. Greed is the source of all cons.”The Wolf of Wall Street was a predator, but so were all those reputable investment banks that shorted the products they were selling, and the retail banks that offered mortgages to unviable borrowers, which they could then repackage and sell as investment-grade securities. They were all wolves in sheep’s clothing.A decent banking system has two functions: to look after depositors’ money and to bring together savers and investors in mutually profitable trades. Savings are deposited with banks because they are trusted not to steal them, and custody has a price. The deals that banks arrange between borrowers and lenders are the lifeblood of modern economies – and risky work for which bankers deserve to be well rewarded. But any money that bankers earn over and above the cost of compensating them for providing an essential service represents what former Britishregulator Adair Turner calls “social waste,” or what used to bedescribed as “usury.”It is not the extent of the financial system that should alarm us, but its concentration and connectivity.In the United Kingdom, an ever-increasing share of bank assets has been concentrated in the fivelargest banks. Standard economic theory tells us that excessive profits are the direct result of concentrated ownership.Connectivity is the link between banks.These links can be locational, as in Wall Street or the City of London. But they became global through the development of derivatives, which were supposed to increase the stability of the banking system as a whole by spreading risk. Instead, they increase the system’s fragility by correlating risk over a much larger space.As a paper by Andrew Haldane of the Bank of England and the zoologist Robert May points out, derivatives were like viruses. Financial engineers and traders shared the same assumptions about the risks they were taking. When these assumptions turned out to be false, the entire financial system was exposed to infection.Concentration and connectivity reinforce each other.Two-thirds of the recent growth of banks’ balance sheets in the UK represents internal claims among banks rather than claims between banks and non-financial firms – a clear case of money breeding money.Reformers want to cap bankers’ bonuses, create firewalls between banking departments, or (more radically) limit a single bank’s share of total banking assets. But the only durable solution is to simplify the financial system. As Haldane and May put it: “Excessive homogeneity within a financial system – all the banks doing the same thing – can minimize the risk for each individual bank, but maximize the possibility of the entire system collapsing.” As long as banks can make a profit from trading, they will continue to expand derivatives in excess of any legitimate hedging demands from non-banks, creating redundant products whose only function is to make profits for their inventors and sellers.How to curtail derivatives is now by far the most important topic in banking reform, and the search for solutions should be guided by the recognition that economics is not a natural science.As May recounts: “The odds on a 100 yearstorm do not change because people think that such a storm has become more likely.” In financial markets, the odds do depend on what people think.The less thinking they have to do, the better. Jordan Belfort was partly right: people who go into financeshould not be too clever.Robert Skidelsky, Professor Emeritus of Political Economy at Warwick University and a fellow of the British Academy in history and economics, is a member of the British House of Lords. The author of a three-volume biography of John Maynard Keynes, he began his political career in the Labour party, became the Conservative Party’s spokesman for Treasury affairs in the House of Lords, and was eventually forced out of the Conservative Party for his opposition to NATO’s intervention in Kosovo in 1999.

There's little sign of diplomatic progress, but the accommodations and service are splendid.

By Claudia Rosett

March 20, 2014 7:37 p.m. ETVienna

Amid the splendors of this ancient city on the Danube, the Iran nuclear talks are waltzing toward a fiasco. Russia's threat this week to change its position on the talks as payback for the West's negative reaction to the invasion of Ukraine could hardly make things worse. The stated aim of the U.S. and its partners is to arrive at a grand bargain ensuring that Iran will not obtain nuclear weapons. The reality is that four months have passed since the U.S. and its partners struck an interim deal with Iran in Geneva proposing to work out a "long-term comprehensive solution." So far, under the negotiating mantra of "nothing is agreed until everything is agreed," the parties appear to be talking mainly for the sake of talking. According to a senior U.S. official at the round of meetings that wrapped up on Wednesday, "We understand each other's concerns."That might work in a marriage, but this is a nuclear negotiation with a murderous, messianic state.Meanwhile, Iran without dismantling its nuclear infrastructure is enjoying a visible easing of sanctions and a celebrity comeback on the world stage.

Iran's Ambassador to the International Atomic Energy Agency, IAEA, Reza Najafi waits for the start of the IAEA board of governors meeting at the International Center in Vienna, Austria, Monday, March 3, 2014. Associated Press

In Vienna, the process has taken on a life of its own. And a comfortable life it is. The Austrian government, delighted to have swiped the nuclear talks from Geneva, is lavishing hospitality on all concerned. That includes the sixworld powers dubbed the P5+1—the U.S., Britain, France, China, Russia and Germany—led by European Union foreign-policy chief Catherine Ashton. Sharing the head table with Ms. Ashton at the main bargaining sessions, while publicly proclaiming Iran's "inalienable right" to enrich uranium, is the star of this show, Iran's chief nuclear negotiator and foreign minister, Mohammad Javad Zarif. For the top negotiators, Austrian authorities have reserved one of Vienna's most magnificent hotels, the Palais Coburg.It is an impeccably restored 19th-century palace, with a royal portico, glittering chandeliers, duplex suites, big Jacuzzis and a lobby built around portions of the historic city walls. Mr. Zarif may be an envoy of the world's top terror-sponsoring state, but at the Vienna talks he is an honored guest; his hotel bill, along with Ms. Ashton's, is paid by the Austrian government.For most of the talking, the negotiators prefer to hunker down at the Coburg.When necessary, and for photo-ops, they shuttle across town to the United Nations complex that houses the International Atomic Energy Agency. The IAEA has the job of monitoring Iran's compliance with its promise under the interim deal to ratchet back, for now, some elements of its nuclear program.For reporters covering the talks, Austria is providing facilities in a huge convention center that adjoins the U.N. complex. The amenities include free cappuccino, cold drinks, hot meals and Austrian chocolates. The staple largely missing from the venue is news.At the two major rounds of the Vienna talks to date, Mr. Zarif and Ms. Ashton have delivered what may be the shortest press conferences on record. Side by side, and flanked by the Iranian and EU flags, they have read brief prepared statements and then left without taking a question. Last month, they pronounced their talks "very productive." This month, in a text that ran to all of fivesentences, they described their talks as "substantive and useful." The next round convenes in Vienna April 7-9.Procedurally, all this counts as success. According to an EU spokesman, Ms. Ashton is "mandated to drive forward these negotiations" and "she is determined to do that." Such determination is the classic mistake of diplomats who become so invested in bargaining that they'll do anything to stay at the table—thus handing the advantage to the other side.Take Russia, a member of the P5+1 team that Ms. Ashton's office and U.S. officials say is "united." This reflects the official urge to envelop Iran in a group hug, and so woo it to kindlier ways. But Russia has its own ideas about how to leverage this collective bargaining. Earlier this week, in response to Russia's grab of Ukraine's Crimea, the U.S. and EU imposed sanctions on several Russian officials. Russia's delegate to the Iran talks, deputy foreign minister Sergei Ryabkov, is now treating the talks not as a P5+1 team venture but as a point of leverage, threatening that Russia might retaliate by taking a separate stance from the other P5 parties on the Iran talks. Iran has its own priorities as well. Tehran is so pleased with the partial easing of sanctions that its officials have been soliciting business and nuclear talent, from Tokyo to Europe's trade fairs. But for all the smiles at the talks, Iran is publicly stipulating that it won't dismantle its nuclear infrastructure, won't stop enriching uranium, won't abandon building the plutonium factory that is its heavy-water reactor near Arak, and won't stop developing ballistic missiles.After the latest round ended, a senior U.S. official offered some procedural details on trying to haggle over or monitor the troubling facilities that Iran is refusing to give up.Speaking on background, the official described a process of identifying "gaps" in agreement among the negotiating parties, and working to "bridge those gaps"—a labor of such technical, political and diplomatic complexity that the official further compared it to "a Rubik's cube—you move one part, you affect the next."Actually, it's not that complex. The equipment that Iran wants to keep isn't vital to an oil-rich and peaceful state. What Iran wants to keep are the elements of a nuclear arsenal. We've seen thisgame before, as U.S. diplomats navigated a maze of bridge-building maneuvers in nuclear talks with Iran's close ally, North Korea. In the end, it comes down to one big gap: The unavoidable fact that the Iranians aren't at the bargaining table to give up the bomb. They've come so they get a breather from sanctions while they finish building it. Ms. Rosett is journalist-in-residence with the Foundation for Defense of Democracies, and heads its Investigative Reporting Project.

If you know the other and know yourself, you need not fear the result of a hundred battles.

Sun Tzu

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.